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26 March 2007
Categories: News
Substitute returns; Online filing; Pre-owned elections; ABA shake-up; Bare trusts; Finance Bill 29/03

Substitute returns

HMRC have announced that while for the most part self assessment paper substitute returns will no longer be approved or accepted from April 2008, they will be for a limited number of taxpayers who cannot file online.
Discussions with tax agents and software developers had demonstrated a high level of interest and concern around the withdrawal of paper substitute self-assessment returns from April 2008. A number of specific issues had been raised and HMRC have been working with the Working Together e-group to address these. HMRC have published a note (see www.hmrc.gov.uk/budget2007/substitute-returns.pdf) which sets out the emerging position to inform software development and the steps HMRC propose to take to respond to points raised. HMRC will continue to work closely with stakeholders in taking this forward and working up detailed guidance and technical specifications. Highlights from HMRC's note follow.
The ban on paper substitutes recommended by Lord Carter will apply to the three main self-assessment returns, i.e. those for individuals, partnerships, and trusts, for 2007-08 returns onwards. But, for the time being, HMRC will continue to accept approved substitutes for the remaining self-assessment returns (including those for registered pension schemes set up under trust and non-resident companies liable to income tax) and for certain other forms they currently approve substitutes for, such as form R40.
Until online services are available for everyone, the natural alternative for this remaining very small group, following implementation of Lord Carter's recommendations, would be to use the official paper form. HMRC appreciate that some of those in this category currently use (either directly or through an agent) software that generates paper substitute returns and that requiring them to complete the official form by hand would be a step backwards. So, for this very small group, they will continue to accept paper returns prepared wholly or partly electronically, subject to the following conditions.
First, these paper returns must be identical to the HMRC form (they will not accept as returns any outputs that are not identical to the official return). HMRC will be working with developers and tax agents to define what 'identical' will mean in practical and technical terms, but anticipate that this will be based on paper prints of the downloaded pdf versions of the official return form placed on the HMRC website. They will accept such returns whether the pdfs are:

  • downloaded and overprinted direct from the website;
  • downloaded, printed, and then filled in by hand; or
  • incorporated into other software before printing.

Second, the paper returns must be signed by the taxpayer (as specified on the form).
HMRC only expect their downloaded pdfs incorporated into commercial software to be used for taxpayers who are not yet able to file online because they have not yet made facilities to file online available to them. Wider use would run counter to Government implementation of Lord Carter's recommendations, unnecessarily losing benefits for customer service and efficiency. If HMRC found substantial inappropriate use, they would need to consider the withdrawal of the pdf facility.
HMRC will be holding further discussions with representatives of both the software developer and tax agent communities to increase their understanding and put this proposal successfully into practice. These conversations will include:

  • defining the detailed parameters of what will and will not be an acceptable return in these circumstances, e.g. allowing for different printing constraints;
  • defining the process for accepting such returns, e.g. training for HMRC staff. As relevant returns must be identical to the official return, HMRC do not anticipate that an approvals process for developers will continue to be necessary.

The professional bodies that are part of the Working Together e-group welcome the agreement from HMRC to streamline personal tax filing. AAT president, Brian Palmer, speaking on behalf of the e-group, says: 'The results of December's survey were crucial in enabling us to substantiate to HMRC the very real concerns that we had over the proposal to withdraw substitute returns'. More information is, however, still needed about returns which cannot be dealt with effectively by FBI and this is the subject of the group's current survey, which over 670 practitioners have completed to date.
Paul Aplin of AC Mole & Sons and deputy president of the ICAEW's Tax Faculty says 'this is a pragmatic solution that will enable those who wish to e-file but cannot and those who wish to file paper returns before 31 October to use a computer generated form for 2007-08 without reverting to pen and ink. The result again demonstrates that working together with HMRC to find acceptable mutually acceptable solutions makes sense'.
Also 'delighted' with HMRC's decision on substitute returns, Valerie Murrell of CCH Software says that many accountants were worried that, for the tax returns of excluded individuals, 'they were going to be thrown back into the dark ages. Also it did not seem fair that these returns were also to be subject to an earlier filing date, just because HMRC could not accept electronic submissions'. She estimates that some 90,000 excluded tax returns have to be completed every year, 'so having to handwrite all those would have been a very depressing prospect, even worse, the time available to handwrite the forms was less than if the return was to be filed electronically'.
www.hmrc.gov.uk


Online filing

Finance Bill 2007 will introduce the legislation needed to implement Lord Carter of Coles' recommendations from his report on the Review of HMRC Online Services. Enquiry windows are to be changed so that they link the period during which HMRC can enquire into income tax self-assessment tax returns and most companies' tax returns to the date the return is received by HMRC. So where a return is received before the filing deadline, the enquiry window will close earlier than under current legislation. This will not apply to large groups of companies whose returns need to be looked at together. The enquiry window for returns from these companies will continue to be linked to the statutory filing deadline as now.
With regard to the change in corporation tax enquiry window, Stephen Herring, Tax Partner at BDO Stoy Hayward, said 'the new rules will mean that corporate taxpayers will generally be able to treat their tax computations as agreed 12 months after they have been received by HMRC. This is a welcome change which many businesses have called for over a number of years'. He said that the measure should encourage 'early filing of corporation tax returns and should put a stop to the existing practice of HMRC sending out, as a matter of routine, large numbers of enquiry notices nearly two years after the end of the taxpayer's year end'.
Legislation will be included in Finance Bill 2007 introducing different filing dates for paper and online self-assessment tax returns. For 2007-08 tax returns and those for subsequent years, there will be two separate filing dates. For paper returns, there will be a new date of 31 October; for returns filed online, the date will remain at 31 January. For taxpayers filing paper returns who want HMRC to calculate their tax liability for them, the cut off date will move from 30 September to 31 October to align with the new paper return filing deadline. Consequential changes will also be made to revise the period during which a return can be amended. Currently, the latest possible date is linked to the first anniversary of the filing date. The introduction of differential filing dates for different methods of filing a return would advance this date for those filing by paper. To avoid disadvantaging those who file early, the amendment window date will be linked to the 31 January anniversary date for all paper and online returns.
With regard to few self assessment tax return filers (including registered pension schemes set up under trust) for whom facilities to file online are not yet available, HMRC will allow extra time (until the 31 January deadline) for these taxpayers to file paper returns.
While these measures implement what Lord Carter recommended and were generally expected, the last announcement relating to taxpayers who cannot file online seems not to have been anticipated by interested parties. Paul Aplin of AC Mole says that it is a 'very welcome recognition that taxpayers who can e-file because of HMRC lack of functionality should not be penalised' by having to file by 31 October.
In addition, the mandatory e-filing of PAYE in-year forms such as P46 and P45 has been put back a year, as has mandatory filing of corporation tax and VAT returns. This is encouraging and shows that the Carter recommendations that new procedures (particularly mandatory ones) should not take place until the relevant HMRC systems have been thoroughly tested, are being followed. As Paul Aplin says, a deadline for such events is only a date, and if systems are not ready, the deadline can be moved. This is definitely a step forward from the pre-Carter era when HMRC would go ahead regardless of the consequences.


Pre-owned elections

It was stated in the Budget notices that the Finance Bill would include legislation allowing HMRC to accept late elections to pay inheritance tax rather than a pre-owned asset tax. Where a person has assets which are subject to the pre-owned assets charge, he can elect for those assets to be treated as forming part of his estate for inheritance tax purposes. Full details have yet to be announced.
Emma Chamberlain, chair of The Chartered Institute of Taxation's capital taxes sub-committee, says that the change allows people who were initially unaware of their liability to the pre-owned assets tax to make a late election once they become aware of the problem. However, she adds that the charge is 'a very unfair tax in that it can catch all sorts of people who have done no inheritance tax planning at all. Unfortunately nothing has been done to deal with these anomalies and ensure the tax is more targeted at stopping inheritance tax avoidance'.
Robin Williamson of the Low Incomes Tax Reform Group, says that the news that HMRC will be allowed to accept late elections will 'particularly benefit those who may have done something unawares to attract the operation of this tax. Some of them may have been on quite low incomes and unable to afford the annual charge. Without this measure, substantial arrears of tax might have been demanded of them when their liability to the charge was identified'.


ABA shake-up

As part of the Chancellor's reform of capital allowances, industrial buildings allowances, introduced in 1945 to encourage post-war reconstruction by productive industry, and agricultural buildings allowances are to be phased out over four years. This will apply to balancing events affected (that is, excluding those in pursuance of a pre-commencement contract or in respect of qualifying enterprise zone expenditure) occurring on or after 21 March 2007.
The measure withdraws balancing adjustments and the recalculation of writing-down allowances in respect of balancing events occurring on or after 21 March 2007, unless:

  • in pursuance of a relevant pre-commencement contract; or
  • in respect of qualifying enterprise zone expenditure.

Describing this change as 'another nail in the coffin for the UK's manufacturing industry', Philip Feibusch of Bourne Business Consulting LLP says that 'it has much wider ramifications including utility and infrastructure companies, distribution and storage trades and even landlords that lease properties to industrial occupiers'.
Explaining what the change means, Philip says that 'currently capital expenditure on new buildings and structures that meet the criteria set out in legislation qualify for tax relief on that expenditure at 4% a year with tax relief being available to subsequent purchasers within a 25-year period of first use of the building'. This relief is to be phased out so that by 2011, industrial buildings allowances will be abolished 'leaving companies with industrial assets unable to claim tax relief on these assets other than if they qualify for plant and machinery allowances. The phased introduction will mean that in 2008-09 three-quarters of the normal industrial buildings allowance will be available, 2009-10 half and by 2010-11 a quarter. From 2011 no relief will be available'.
Philip adds that the reduction in allowances will not hit until next year, but from Budget day, the rules around balancing adjustments have changed. Previously a sale at a profit could result in a clawback of tax allowances previously given. This will no longer happen; although the taxpayer can no longer claim allowances on an asset he does not own, he keeps the relief previously given. However, if the building is sold or demolished at a loss, a balancing allowance will not arise on expenditure that has not yet been the subject of relief. Although there are minor small exceptions to these transitional rules around enterprise zone allowances and certain contracts entered into prior to 21 March 2007, the new rules will catch the majority of industrial buildings and structures.
Philip says that 'the existing industrial buildings allowance regime has been the subject of much criticism due to the administrative burden involved in tracking expenditure on historic expenditure and the complicated rules on qualifying use which have led to numerous commissioners and court cases. However, the complete removal of this tax relief comes as a surprise. Although the reduction in the corporation tax rate and the changing long life asset rate could be said to be recompense, it is unlikely to satisfy those who feel there should be more incentives to invest in the infrastructure and manufacturing of this country, not less'.
Ernst & Young's Paul Davies says that the 'gain from the rate reduction will be more than clawed back by the change in plant and machinery capital allowances. As a result, it is clear that the main beneficiaries of the rate cut will be in the service sector rather than the manufacturing sector'.

Bare trusts

HMRC have confirmed in the light of the further advice that they have received, that a lifetime gift on trust for a minor absolutely, whether or not the provisions of Trustee Act 1925, s 31 are excluded, is a potentially exempt transfer, says the Chartered Institute of Taxation.
The CIOT and other representative bodies have been pressing for clarification since this issue was first raised in December 2006 and are pleased that HMRC have confirmed that an absolute trust of this kind is not a settlement for inheritance tax purposes. HMRC now accept that the beneficiary has an immediate and absolute right to both capital and income, and only the beneficiary's minority will prevent such beneficiary from being able to require the trustees to convey the trust property to him. The trust property, (including any accumulations of income if section 31 applies), will form part of the beneficiary's estate for IHT purposes.
HMRC will update their Inheritance Tax Manual shortly.
Skandia's Colin Jelley says that HMRC's 'original proposals would have had far-reaching consequences'. He welcomes 'the fact that HMRC have engaged with the industry and consulted on this aspect of the Finance Act changes' and hopes that Government 'continues to consult in formulating tax policy to ensure that the implications of changes are fully thought through'.
CIOT press release 23 March 2007


Finance Bill

The Finance Bill will be published on 29 March.

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